Default on a Private Mortgage

Default on a private mortgage occurs when the borrower fails to meet the terms of the mortgage agreement, such as missing payments or failing to maintain the property. When a borrower defaults on a private mortgage, the lender has legal remedies to recover the debt, which may include foreclosure or power of sale.

Addressing Private Mortgage Default

1. Review the Mortgage Agreement/Commitment

The first step in addressing a private mortgage default is to carefully review the mortgage agreement. The agreement will specify terms of the loan, repayment schedule and the lender’s rights in the event of default. Consulting with a lawyer at this stage is essential to understanding the legal obligations and options available under the agreement.

2. Notice of Default

When a borrower defaults on a private mortgage, the lender typically issues a Notice of Default. This notice informs the borrower that they are in breach of the mortgage terms and informs the steps needed to remedy the default, such as making overdue payments. The notice may also specify a deadline for curing the default. If the borrower fails to remedy the default before or by the deadline provided, the lender may proceed with legal action.

3. Power of Sale or Foreclosure

In Ontario, lenders have two primary legal remedies for dealing with a default: Power of Sale and Foreclosure.

Power of Sale allows the lender to sell the property to recover the outstanding debt. This process is faster and more commonly used than Foreclosure. For example, most Power of Sales can be complete within 6 months, but on the other hand, a Foreclosure can take over a year to complete. Once the property is sold, the lender can use the sale proceeds to pay off their mortgage, legal fees, and other costs. Any surplus is returned to the borrower.

Foreclosure, is a court process in which the lender takes ownership of the property. The lender then keeps the property and does not have to account to the borrower for any surplus. However, Foreclosure is less common than Power of Sale because it is a lengthy and expensive process.

4. Issuing a Notice of Sale Under Mortgage

If the lender chooses to proceed with a Power of Sale, they must first issue a Notice of Sale Under Mortgage. This notice gives the borrower 35 days to pay off the outstanding debt, including any legal fees and costs incurred by the lender. During this redemption period, the borrower can still save their property by paying off the arrears. If the borrower fails to do so within the given 35 days, the lender can proceed with the sale of the property.

5. Listing the Property for Sale

Once the redemption period has expired, the lender can list the property for sale. The lender has a legal obligation to sell the property for fair market value, which may involve listing it with a real estate agent, conducting appraisals and marketing it to potential buyers. The sale of the property must be conducted in good faith, with the goal of achieving the best possible price for the property.

6. Disbursement of Sale Proceeds

After the property is sold, the proceeds are used to pay off the mortgage debt, legal fees, real estate commissions and any other costs incurred by the lender. If there are any surplus funds remaining after these expenses are paid, the surplus is returned to the borrower. If the sale proceeds are insufficient to cover the outstanding debt, the lender may pursue a deficiency judgment against the borrower to recover the remaining balance.

7. Court Process in Foreclosure

If the lender opts for foreclosure instead of power of sale, the lender has to file a Statement of Claim in court. The lender asks the court for an order granting ownership of the property, effectively extinguishing the borrower’s rights. The borrower can respond with a Statement of Defence, raising any objections to the foreclosure. The court may grant foreclosure if the lender proves that the borrower is in default and that other remedies are not possible.

8. Redemption Rights and Final Order

During the foreclosure process, the borrower may still have an opportunity to redeem the mortgage by paying off the outstanding debt before the court issues a final foreclosure order. Once the final order is granted, the borrower loses all rights to the property and the lender becomes the legal owner. Unlike power of sale, the lender does not have to account for any surplus funds after the foreclosure.

9. Eviction and Possession

After a successful power of sale or foreclosure, the lender can take possession of the property. If the borrower or other occupants refuse to leave, the lender may need to obtain an eviction order from the court. Once the property is vacated, the lender can proceed with the sale or, in the case of foreclosure, take possession as the new owner.